Moody’s Investors Service avers that the development of domestic securitization markets will help India and China achieve their common goal of building inclusive financial systems that will ultimately bring affordable credit to the underprivileged segments of their societies and which are usually excluded from the conventional banking system.
“In both countries, in this context, non-bank finance companies (NBFCs) are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest costs for such loans,” said Moody’s Assistant Vice President Georgina Lee. “While there are various funding avenues open to NBFCs in India and China, securitization has proven to be reliable and competitively priced, and is therefore an important source of the funds the NBFCs use for lending.”
Moody’s conclusions were contained in a just released report (that can be read if purchased here) on securitization in Indian and China, “Securitization – India and China: Securitization Funds NBFCs’ Lending to Promote Spread of Financial Inclusion.” Moody’s notes that the specialty of NBFCs is their ability to offer more tailored and flexible loan products to the underserved, weaker segments of society.
For example, turnaround times from loan application to disbursement are faster than those of the banks, while their knowledge of local industries and submarkets and their ability to understand the credit profiles of their borrowers — despite a lack of information — help them underwrite credit to borrowers otherwise ineligible for bank loans. In such an environment, in both India and China, securitization enables, as indicated, financially weak or small businesses that have little or no track record to access cost-competitive funding. As repayment of securitization notes rely on the asset pool instead of repayment capability of the originator, securitization could offer lowly-rated originators an opportunity to issue transactions at a higher rating (and lower costs) than unsecured borrowings.
The Moody’s report further notes examples of how securitization has helped such originators and borrowers. In India, the Reserve Bank of India in September 2015 granted approval to 10 entities — including eight micro-finance institutions (MFIs) — to operate as small finance banks. With the aim of promoting financial inclusion to under-served segment, these small finance banks will accept deposits and extend credit to marginal farmers and small business units. Their mandate overlaps with the target market of MFIs.
In this case, Moody’s indicates securitization will continue to be instrumental for these small Indian finance banks, as it will take time for them to develop a retail deposit franchise. At the same time, NBFCs and MFIs will continue to fund through securitization as the sector grows. In China, innovative securitization transactions have enabled smaller scale small loan companies to capture competitive capital market financing opportunities, irrespective of the size of their balance sheet or the volume of their business.
However, there are key differences in the dynamics of how the markets in both countries are evolving. In India, there are regulatory requirements in the form of the priority sector lending targets that the Reserve Bank of India has imposed on banks, thereby continuing support for the uptake of securitization transactions issued by NBFCs. In China, however, such a regulatory mandate on the investor-side of securitization is absent. Without such important support from institutional investors, the applicability of securitization in achieving the goal of financial inclusion has not been as widely used in China as in India.